Trusts still a valuable tool in estate planning despite HMRC changes

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HMRC has confirmed that new proposals for a single nil rate Inheritance Tax (IHT) band for trusts will not be applied to existing trust arrangements, where no further assets are added or variations made to that trust.

This will create demand for financial advice to ensure thousands of existing trust arrangements are not caught by the new rules.

Despite these changes, trusts will remain a valuable tool for advisers to use when carrying out estate planning for their clients, says Skandia.

A new consultation paper published by HMRC, called Inheritance Tax: a fairer way of calculating trust charges, clarifies the government’s proposals and advisers need to be aware of how they can advise their clients if this new dual IHT regime for trusts comes into force.

Setting up multiple trusts on different days, each with its own nil rate band below the GBP325,000 IHT limit has proved a popular wealth planning strategy for many advisers and clients over the years. HMRC were concerned this tax planning arrangement was being abused, and set about consulting with the industry on how it could close down this practice by introducing a single nil rate band for all trusts created by the same individual.

It was feared the new proposals would be retrospective, and HMRC would introduce a single nil rate band across all existing trusts. This would have meant some existing trusts facing a tax charge for the first time at the 10 year periodic charge point.

HMRC has proved to be pragmatic in its approach by proposing to leave existing trusts alone. Trusts set up prior to 6 June 2014 will remain under the current arrangements, creating a dual IHT regime for trusts. The proposed changes will take effect from 6 April 2015, and will only apply to trusts set up on or after 6 June 2014.

However, trusts created before 6 June 2014 are not completely out of reach. If any trust has additional assets added to it or where it becomes a relevant property trust on or after 6 June 2014, the change will bring that part of the settlement into the new regime. Advisers have the opportunity to help their clients preserve the benefits of their existing trusts. For example, if a client has more assets to add to their trust, the creation of a new trust may be more beneficial than adding it to an existing one.

Although it may no longer be possible for advisers to use multiple nil rate bands, advisers should still consider trusts as a core part of estate planning. Set up in the right way, clients can still benefit greatly. With inheritance tax on death set at a substantial rate of 40 per cent, using trusts could still be an attractive option for many families despite the maximum charge of six per cent every 10 years. Trusts continue to offer many advantages over a will for estate planning purposes, such as no probate and more certainty and protection.

Rachael Griffin, head of technical marketing at Skandia, says: “HMRC has been pragmatic in its proposals. With the right advice it is possible for existing trusts to remain unaffected preventing thousands of trusts becoming liable to tax, avoiding a headache for both clients and advisers. Trusts will continue to offer advantages in estate planning compared to relying solely on a will to pass assets on. Advisers can add value by ensuring the tax efficient benefits are maintained and the new rules are applied correctly.”